For the past three years I’ve been looking at Unilever (LSE: ULVR) (NYSE: UL.US) and thinking that, relative to the FTSE 100 average, its shares were just a bit overvalued.
But you know what’s happened? Unilever has put in a couple more solid sets of results, and the average FTSE valuation has pretty much caught up. Unilever shares, at 2,365p, trade on a forward P/E of 18, with the FTSE average standing at 16.5 — and Unilever’s expected dividend yield is higher.
Beating the FTSE
Sure, the Unilever price has fallen over the past 12 months, by around 13% against a 2% rise for the FTSE 100 — but over three years it’s put in twice the FTSE’s growth with a 30% gain, and over 10 years Unilever shares have doubled while the FTSE has gained just 50%.
And all that time, shareholders have been raking in nice dividends, too.
What does that tell me about choosing shares for an ISA? That the odd year or two here and there doesn’t matter, and that quality companies measured over a timescale of decades are exactly the kind we should be surrounding with our tax-protection wrappers.
Ideal for an ISA?
After all, we’ll be able to invest up to another £11,760 in our ISAs for the 12 months from April, and it pays to check out which shares are likely to profit the most over the very long term. So what might an investment in Unilever be worth in another 20 years time?
That doubling over the past decade is the equivalent of an annualised growth of around 7% per year, but let’s not be that optimistic for the future — let’s work on a share price growth of 5% per year and see where that takes us.
We also have to include dividends, which have been averaging a yield of around 3.5% in recent years — forecasts suggest 3.8% for the coming year and 4.1% for 2015, but let’s be conservative again and stick with 3.5%.
How much?!
If that 3.5% yield is reinvested in shares every year, and the share price averages 5% growth per year, £1,000 invested in Unilever shares would turn into more than £5,000 in 20 years!
The same £1,000 in a typical cash ISA would get you just £1,300. Seems like an easy choice to me!